Soar to Success June 2015

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By Tina Moe, CPA
Just thequestionalonecanmakemostbusiness
owners cringe, but the repercussions of not
asking the question can be so much worse. Of
course, the question I usually get in response to
this is, “What does that even mean?”
Tax compliance is a vast - very vast- topic and
covers everything under the sun, from paying
your employees properly to income recognition
and much more. The question I always ask
is, “If the IRS or any of the various state
governmental entities came knocking, what
would be their points of contention? Where are
your vulnerabilities?”
The IRS and other governmental agencies
aren’t always looking at what you think they are.
What may seem irrelevant and unimportant to a
business owner can mean a significant change
to your tax picture.
Matt owned a local construction business where
he had both employees and subcontractors.
Like many in his industry, he’d pay one guy as
a subcontractor to try him out and, if the guy
was any good, he’d put him on payroll. What
Matt didn’t realize was that he couldn’t do this
if the guy was performing the same job as both
a subcontractor and as an employee, and that
issuing both a 1099 and a W-2 to the same
individual in the same year could flag him for a
closer look by the IRS.
The IRS did, in fact, take a closer look, and after
performing an investigation deemed that the
1099 payments were really wages. Matt was
faced with owing the back employer taxes on
over $35,000, as well as penalties and interest.
A costly and painful lesson to learn!
Deborah was in sales and had several
manufacturers she used to make her equipment.
The equipment she sold was custom made,
so she required a deposit from her customer
before the equipment went to manufacturing.
Once the equipment was delivered, she would
collect the additional amounts due and the deal
was finalized. In Deborah’s mind, the initial
deposit wasn’t income because the sale hadn’t
finalized; but what she didn’t know cost her.
According to the IRS, if you take a nonrefundable
deposit from a customer it must be recognized
as income in the year it is paid. This means
Deborah underreported her income for three
consecutive years.
The IRS discovered this, taxed the additional
income and charged penalties and interest,
which she is still paying back.
Is Your Business
Tax Compliant?
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SOAR TO SUCCESS | JULY 2015 | Core Business Strategies